Notice to Plans and PBMs: Pay for Contraceptive Services and Maybe We Will Pay You Back

As has been widely covered in the news, regulations and guidance developed under the Affordable Care Act (“ACA”) require that non-grandfathered health plans make preventive care and screenings available to their members at no cost (i.e. no deductibles, coinsurance, or co-payments). The Department of Health and Human Services (“HHS”) was charged with developing guidelines for preventive services and determined that contraceptive services, which include all Food and Drug Administration (“FDA”)-approved contraceptives, should be made available to plan members at no cost. This determination resulted in protests from religious employers who believe that forcing them to offer and pay for contraceptive services, something to which they are religiously opposed, violates their first amendment right to religious freedom.

Religious Freedom Exemption

Due to the concerns raised by religious employers, the government sought to create an exception to the contraceptive coverage mandate for religious employers that would protect the employer’s first amendment rights while still allowing women plan members to receive contraceptive services at no cost. The result is a convoluted system in which health plans and third party administrators, including pharmacy benefit managers (“PBMs”), must pay for these contraceptive services and then receive reimbursement for the services more than a year later, if at all.

To address religious freedom concerns, the Department of Labor (“DOL”) and HHS promulgated regulations creating an exception to the contraceptive coverage mandate for religious employers that qualify as an “eligible organization.” An “eligible organization” is one that self-certifies that it is an “eligible organization” and therefore is not required to pay for coverage of contraceptive services for its plan members. Although this portion of the regulations is intended to respect the religious freedom of the eligible organization, the Little Sisters of the Poor have challenged the certification requirement arguing that it violates their rights by forcing them to sign a permission slip that in essence instructs another entity (their plan administrator) to do something to which they are morally opposed, provide contraceptive services to their members. Other religious entities have begun to follow the Sisters’ lead. The U.S. Supreme Court granted the Little Sisters of the Poor an injunction while their case is pending in the Tenth Circuit Court of Appeals. Under current regulations, once the eligible organization has self-certified, the responsibility to provide contraceptive services at no cost passes to the eligible organization’s health plan or PBM. This portion of the regulations is intended to respect a woman’s right to access contraceptive services at no cost.

Stuck between the ACA contraceptive coverage requirement and the religious freedom exemption are the health plans and PBMs servicing these eligible organizations. Current HHS/DOL regulations require these health plans and PBMs to provide contraceptive services at no cost and without passing the cost of the services on to the eligible organization or its plan members. (It is unclear how health plans and PBMs should act when faced with a situation where an eligible organization refuses to self-certify, as the Little Sisters have done.) In addition, coverage for contraceptive services may not be built into the plan premiums charged to the employer or the member. This means that when an eligible organization’s plan member goes to a pharmacy to receive a contraceptive drug, the pharmacy must provide the drug to the member free of charge and charge the health plan or PBM for the drug. The health plan or PBM then pays the pharmacy for the drug, but no one reimburses the health plan or PBM. So when, if ever, are these companies reimbursed for the provided contraceptive services? Who pays for them? The answers vary based on whether the services are provided by a health plan or a PBM.

Health Plans

Health plans that provide the mandated free contraceptive coverage to eligible organization plan members are able to recoup these costs through a direct reduction in the Federal Facilitated Exchange (“FFE”) User Fee. The FFE User Fee is a tax that the health plan must pay in order to participate in a federally facilitated Exchange. A health plan’s Exchange tax will be reduced by the amount of money the health plan paid during the previous year for contraceptive services provided to eligible organization plan members. In addition, a health plan’s Exchange tax will be reduced by an “allowance” to cover the health plan’s administrative costs for providing free contraceptives. For 2014, HHS has proposed that the “allowance” equal 15% of the total dollar amount that the health plan pays for applicable contraceptive services. This mechanism provides a direct avenue for health plans to obtain reimbursement, but health plans will not receive this “tax credit” until the year after they paid for the services (tax credits will be granted in 2015 for services provided in 2014). This will result in health plans being forced to float the money for the contraceptive services and administrative services for at least a year.

PBMs

Third Party Administrators (which for purposes of these regulations includes PBMs) that provide the mandated free contraceptive coverage to eligible organization plan members may recoup service costs only by contracting with a health plan that agrees to report the PBM’s contraceptive costs to the government. Under such an arrangement, the health plan would report the payments for contraceptive services provided by the PBM and, in return, receive a reduction in its Exchange tax, just as though the health plan itself had paid for the contraceptive services. The reduction would similarly include the administrative cost “allowance” of 15% for 2014. The health plan is then required to pass on to the PBM the amount of the Exchange tax reduction it received as a result of the PBM payments for contraceptive services, but it is not required to pass on to the PBM the administrative cost allowance. The health plan and PBM may negotiate to determine how the allowance will be divided between the two entities. PBMs that are able to find a health plan partner must inform HHS that they are planning to request reimbursement. This notice must be given at the later of January 1, 2014 or sixty (60) days after receiving an eligible organization’s self-certification.

Difficult Scenario for PBMs

In establishing this mechanism, DOL and HHS failed to consider the following:

First, providing and paying for services and not being compensated for over a year imposes a financial hardship on plans and PBMs. Second, the regulations create a difficult scenario for PBMs. Because PBMs do not have a direct reimbursement mechanism, the regulations heavily favor PBMs that are owned by health plans and therefore have a built-in partner for purposes of providing contraceptive services. If independent PBMs want to receive any reimbursement for these mandated services, they will have to expend significant resources and incur significant costs to identify a health plan partner. If a PBM is unable to identify a health plan partner, it will not be paid at all for the contraceptive services or its administrative costs. Even if a PBM is able to identify a health plan partner, the partner may not agree to pass on the administrative allowance. PBMs must expend resources (time, employees, claims processing systems, contracting, etc.) to provide the contraceptive services, but there is no guarantee that the health plan it convinces to be its partner will agree to pass through any of the “allowance,” therefore leaving the PBM with a loss.

Pending Supreme Court Cases

It is unclear how much money is at stake for plans and PBMs, but the amount could potentially increase significantly based on cases pending before the Supreme Court. In March of this year, the Supreme Court will consider cases involving for-profit, secular employers, such as Hobby Lobby, requesting on religious grounds the same contraceptive exception as that available for “eligible organizations.” The outcome of such cases could potentially increase the volume of services that fall under this mechanism, in turn increasing the burden on health plans and PBMs.

Theresa Carnegie’s practice involves a variety of transactional, regulatory, and fraud and abuse matters. Her transactional experience focuses on advising health care clients on joint ventures, mergers and acquisitions, service agreements, and corporate stock and asset acquisitions. She has served as corporate and regulatory counsel to retail pharmacy chains, pharmacy benefit managers, and health care providers in acquisitions, which included due diligence, licensing, change of ownership, Medicare and Medicaid state certification, and contracting. She has deep experience preparing and negotiating pharmacy network agreements, pharmaceutical purchase and distribution agreements, and rebate agreements.

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